Question

On December 11, 2018, Undersecretariat of Treasury operated a government bond sale auction and sold around 2.8 billion worth of TL denominated government bonds at an average interest rate of 18,62%. However, on December 10, 2018, the interest rate on government bonds of a similar maturity was around 20,50%. More interestingly, the average interest rate on government bonds on December 12, 2018 had been around21 ,37%. Based on these numbers, please explain The auction rules and procedures of The Undersecretariat of Treasury and how it had been possible to borrow at a much lower rate on December 11,2018? 1)

Answer 1

Answet Bond Auction rules and procedure

II. BONDS II.1. GENERAL RULES FOR THE BOND AUCTIONS 8. The Bond Auction Execution Mode 8.1. The Bond auctions are executed in two phases: a) 1st phase by competitive bidding and b) 2nd phase - by non-competitive bidding. 9. The First Phase Auction Rules (Competitive Bidding) 9.1. In the competitive bidding PDs will submit the bids in their own name and for their own account as well as the bids in their own name and for the account of investors (the "Competitive Bids"). PDs are not obliged to submit Competitive Bids in their own name and for their own account. 9.2. Every PD may submit an unlimited number of Competitive Bids. 9.3. The nominal amount of every individual Competitive Bid must be equal to or higher than 100.000 EUR. 9.4. PDs will enter competitive bids into BAS in the number of Bonds of a given Bond auctioned. The number of Bonds of a competi section Rule 9.3 above and must be rounded to 1 single Bond. tive bid must be in compliance with the 9.5. PDs will enter into BAS the price of each sing competitive bid expressed as percentage of the nominal amount of bid rounded to two decimal places. The nominal amount of each bid represents the number of Bonds of each bid, multiplied by nominal value of one Bond that is being bid. 9.6. In the process of selection and valuation of competitive bids, every submitted bid l be treated as a separate and independent bid. Ministry of Finance will multiply the bids received as a number of Bonds with the nominal value of the one Bond that is being bid, thus converting them into nominal amounts and will continue to treat them, for the purpose of further selection procedure, as bids expressed in nominal amounts. 9.7. All of the Competitive Bids will be ranked, starting with the highest priced bid to the lowest priced bid. Every individual Competitive Bid may be accepted at the bid price or rejected, in a part or in total 9.8. The Competitive Bids will be accepted in the same order as they were ranked until the sum of the nominal amounts of such Competitive Bids reaches such a total nominal amount of issue of a given Bond as the Ministry of Finance is prepared to accept in the 1st phase of the auction (the "Competitive Allocation A 9.9. I the sum of Competitive Bids at the Cut off Price is higher than the total nominal the 1st phase amount that the Ministry of Finance is prepared to accept at this price in of the auction, such bids are accepted partly. The Cut off Price is the lowest price of the Competitive Bids accpeted in the 1 phase of the Auction. 9.10. Each one of such Competitive Bids is accepte of such a bid d in the part that equals the split amount

10.7. I the sum of the nominal amounts of all Non-competitive Bids submitted is higher than the Non-competitive Allocation Amount, those PDs who have submitted Non- competitive Bids have a right to subscribe their bids at eshe Guaranteed Allocation Amount. 108. The Guaranteed Allocation Amount is calculated as Non- competitive Allocation Amount divided by the number of all of the PDs nominated by the Ministry of Finance for a given selection period. The sum of all Guaranteed Allocation Amounts shall not exceed the total Non-competitive Allocation amount. 10.9. If circumstances described in Section 10.6 shall occur each submitted in a nominal amount equal or lower than the Guaranteed Allocation Amount, is accepted in the submitted in a nominal amount higher than the Guaranteed Allocation Amount is accepted in a proportionally reduced bid amount (the "Calculated Allocation Amount") nominal amount bid. Each Non-Competitive Bid 10.10. The Calculated Allocation Amount is the sum of the Guaranteed Allocation Amount 10.11. The Additional Amount is cakculated as the product of the Split Factor and the Non- 10.12. The Split factor is the proportion of the Individual Exceeded Calculated Amount in and the Additional Amount. allocated Residue of Non-competitive Allocation Amount. the sum of all Individual Exceeded Calculated Amounts (expressed in percentage and is not rounded). The Individual Exceeded Calculated Aun is the difference between the nominal amount of an individual Non-competitive Bid and the Guaranteed Allocation Amount. 10.13. The Non-allocated Residue of Non-competitive Allocation Amount is the difference between the Non competitive Allocation amount and the sum of all bids with a lower or equal nominal amount than the Guaranteed Allocation Amount. Each of the Calculated Allocation Amounts are to be rounded to the nominal value of one bond. If the sum of all Calculated Allocation Amounts rounded to the value of ane bond is higher or lower than the Noncompetiive Allocation Amount, the rounded Calculated Allocation Amount of one or some PDs (selected at r adjusted for such a number of bonds which make the sum of the Calculated Allocation Amounts equal to the 10.14. andom) are Non-competitive Allocation Amount. I1.2. PROCEDURES FOR THE BOND AUCTIONS EXECUTION 11. The Competitive Bidding Invitation At least 5 working days before the Auction Date, a formal invitation to the PDs will be sent by Ministry of Finance through compliance with the Issuer's Manual (the "Competitive Bi 11.1. the BAS after setting up a tender in 11.2. The Competitive Bidding Invitation shall include: a) the name of auction (the issue identification), b currency of the issue c the number of Bonds offered in the 1 phase for each the Bonds auctioned d) the nominal value of a single Bond for each of the Bonds auctioned, e) the invitation date and time, f the period for submission of bids in the competitive p hase of the auction (date and time), g) the time of the release of the auction results, h) the settlement date, i) the bids format, j) other information considered relevant fer the ution

a) the value of each individual bid expressed as number of Bonds b) bid price (expressed as percentage of nominal value of the bid, rounded to two decimal places) c) uniform identification code (the "ID code") or KID code of the PD, ID code or KID code of the investor (in case that the Bonds will be issued into investors holders account), the investor's citizenship code (in case the investor is a physical person) in the corresponding "note field" 13.3. The PDs are obliged to accept the investors' orders until 11:00 am. However they may accept the orders after 11:00 am if they consider such an order to be executable by the closing time for the submission of the Competitive Bids. Bids registered in the BAS at the closing time will be considered firm and binding. 13.5. The Ministry of Finance will ensure the confidentiality of the bids whereby none of the bids will be known to any of the other participants before the public release of the auction results.

According to bond dealers, shorter-maturity papers and floating rate bonds, popularly known as FRBs, tend to have lower risks from fluctuating interest rates. Therefore it is possible to borrow at lower rate.